Internal Theft Controls & Personnel Issues

Unit 6 Seminar

Al Dauser, CPP, CFIAdjunct Professor

School of Criminal Justice

Tonight’s Question

• In this seminar, we will discuss dishonest employees, the “theft triangle,” and the contagion of theft as described in your textbook readings.

Introduction

• Every company will suffer losses from internal theft

• Internal theft in the retail business outstrips the loss from shoplifting approximately 7.9 times

• Loss Prevention Consultants reported the significance of the employee-theft problem– National Retail Federation-- $19.5 billion

loss from employees

What is Honesty?

• Relative honesty– If an error is made in your favour in

computing the price of something you buy, do you report it?

– If a cashier gives you too much change, do you return it?

– If you found a purse containing money and the owner’s identification, would you return the money to the owner if the amount was $1? $10? $100? $1000?

Honesty

• Honesty is a controllable variable• The individual’s honesty can be

evaluated by assessing the degree of two types of honesty–Moral• a feeling of responsibility and respect that

develops during an individual’s formative years

– Conditioned• results from fearing the consequences of

being caught

Dishonesty

• The job should not tempt an employee into dishonesty

• There is no sure way by which potentially dishonest employees can be recognized– Proper screening procedures – There are even tests that purport to

measure an applicant’s honesty index

The Dishonest Employee

• There is no fail-safe technique for recognizing the potentially dishonest employee on sight

• It is important to try to gain some insight into the reasons why employees may steal

• Some employees steal because of resentment over real or imagined injustice

• Some feel that they must maintain status and steal to augment their incomes

• Some simply want to indulge themselves

The Theft Triangle

• (1) motive– a reason to steal

• (2) desire– imagining the satisfaction or

gratification that would come from a potential action

• (3) opportunity– is the absence of barriers that prevent

someone from taking an item

Danger Signs• Conspicuous consumer• Employees who habitually or suddenly acquire expensive cars and/or clothes and

who generally seem to live beyond their means• Employees who show a pattern of financial irresponsibility• Employees caught in a genuine financial squeeze

– Gambling on or off premises– Excessive drinking or signs of other drug use– Obvious extravagance– Persistent borrowing– Requests for advances– Bouncing personal checks or problems with creditors

Poor hiring decisions are at the root of many

management problems!!

What Employees Steal• Anything that may be useful or that has resale value• The thief can get at the company funds

– collusion with vendors– collusion with outside thieves or hijackers– fake invoices– receipting for goods never received– falsifying inventories– payroll padding– false certification of overtime– padded expense accounts– computer records manipulation– overcharging– undercharging– gaining access to a cash box

Loss in Unexpected Areas

• Furnishings frequently disappear• Desks• Chairs• Computers• Other office equipment• Paintings• Rugs

Methods of Theft• Payroll and personnel employees collaborating to falsify

records by the use of nonexistent employees or by retaining terminated employees on the payroll

• Padding overtime reports and kicking back part of the extra unearned pay to the authorizing supervisor

• Pocketing unclaimed wages• Splitting increased payroll that has been raised on signed,

blank checks for use in the authorized signer’s absence• Maintenance personnel and contract servicemen in

collusion to steal and sell office equipment

Methods of Theft (cont.)• Receiving clerks and truck drivers in collusion on

falsification of merchandise count (Extra unaccounted merchandise is fenced.)

• Purchasing agents in collusion with vendors to falsify purchase and payment documents (The purchasing agent issues authorization for payment on goods never shipped after forging receipts of shipment.)

• Purchasing agent in collusion with vendor to pay inflated price

• Mailroom and supply personnel packing and mailing merchandise to themselves for resale

• Accounts payable personnel paying fictitious bills to an account set up for their own use

• Taking incoming cash without crediting the customer’s account

Methods of Theft (cont.)

• Paying creditors twice and pocketing the second check• Appropriating checks made out to cash• Raising the amount on checks after voucher approval or

raising the amount on vouchers after their approval• Pocketing small amounts from incoming payments and

applying later payments on other accounts to cover shortages

Methods of Theft (cont.)

• Removal of equipment or merchandise with the trash• Invoicing goods below regular price and getting a kickback from

the purchaser• Manipulation of accounting software packages to credit personal

accounts with electronic account overages• Issuing (and cashing) checks on returned merchandise not

actually returned• Forging checks, destroying them when they are returned with the

statement from the bank, and changing cash account records accordingly

• Appropriating credit card, electronic bank account and other electronic data.

Management Responsibility in Loss Prevention

• The enormous losses in internal theft come largely from firms that have refused to believe that their employees would steal from them

• National crime figures do not necessarily concern each manager– figures can be shrugged off as an enormous

problem that someone else must deal with –managers cannot afford to close their eyes

to the potential damage

The Contagion of Theft

• Theft of any kind is a contagious disorder• Petty, relatively innocent pilferage by a few spreads

through the facility• The act of petty pilferage is no longer viewed as

unacceptable conduct

• Even where the amount of goods taken by any one individual is small, the aggregate can represent a

significant expense

Moral Obligation to Control Theft

• Important to observe that management has a moral obligation to its employees to protect their integrity by taking every possible step to avoid presenting open opportunities for pilferage and theft

• The company should keep its house sufficiently in order to avoid enticing employees to acts that could result in great personal tragedy as well as in damage to the company

Program for Internal Security

• Survey every area in the company to determine the extent and nature of the risks

• Security survey refer to Chapter 8

Need for Management Support

• It is especially important that the strong support of top management be secured

• Will require cooperation at every level– Cooperation is sometimes hard to get in situations

where department managers feel their authority has been diminished in areas within their sphere of responsibility

• Any hesitation or equivocation on the part of either management or security at this point could damage the program before it has been initiated

Without sound procedures and tight inventory

controls, it may be difficult to determine where the

theft problem stems from and who is responsible.

Communicating the Program

• Communicate necessary details of the program to all employees

• Can be handled by an ongoing education program or by a series of meetings explaining the need for security and the damaging effects of – internal theft to jobs– Benefits– profit sharing– the future of the company

Continuing Supervision

• Old employees must be reminded regularly of what is expected of them

• New employees must be adequately indoctrinated in the system they will be expected to follow

• There must be a continuing program of education if expected results are to be achieved

Program Changes

• Reasonable controls will create duplication of effort, crosschecking, and additional paperwork

• Virtually every system can be improved and should be evaluated constantly with an eye for such improvement

• No changes should be permitted by unilateral employee

action

Violations

• Violations should be dealt with immediately• As soon as any procedural untidiness appears and is

allowed to continue, the deterioration of the system begins

The almost universal use of the computer for business purposes

has both assisted security in monitoring employee honesty and

presented new challenges in insuring computer data integrity.

Personnel Policies

• There is no greater need for cooperation than between Human Resources and Security.

• Security’s job is simpler when the right person is hired

• The amount of employee turnover or volume of new hires often makes a comprehensive program an impossibility

• Records on employees, the security department should be responsible for conducting thorough background checks on specific employee positions

Human Resource Screening

• Basic to internal security effectiveness is the cooperation of that majority of honest personnel performing as assigned and in so doing refusing to initiate or collaborate in conspiracies to steal

• Screening is the process of finding the person best qualified for the job in terms of both skills and personal integrity

Employment History and Reference Checking

• Key to reducing internal theft is the quality of employees employed by the facility

• Knowledgeable screener who is aware of what to look for in the employment application or résumé can develop an enormous amount of vital information about the prospective employee

Federal Legislation

• Title VII of the Civil Rights Act of 1964• Pregnancy Discrimination Act of 1978• Executive Order 11246 (affirmative

action)• Age Discrimination in Employment Act• National Labor Relations Act• Rehabilitation Act of 1973• Vietnam Era Veterans’ Readjustment

Assistance Act of 1974

Federal Legislation (cont.)• Fair Labor Standards Act of 1938 (The Wage and

Hour Law) (being revised as of • this writing)• The Federal Wage Garnishment Law• Occupational Safety and Health Act of 1970• Immigration Reform and Control Act of 1986• Employee Polygraph Protection Act of 1988• Consolidated Omnibus Budget Reconciliation Act

of 1985• Worker Adjustment and Retraining Notification

Act (Plant Closing Law)• EEOC Sexual Harassment Guidelines• The Americans with Disabilities Act

Table 13-2

• Examples of Acceptable and Unacceptable Inquiries for Preemployment Screening

Controversial

• There is some confusion regarding the rules governing employment screening

• Security management should consult with legal counsel to determine which laws relate to their locality and establish firm and precise policies regarding employment applications and hiring practices

Applicants– Poor Risks • Show signs of instability in personal relations• Lack job stability: A job hopper does not make a good job

candidate• Show a declining salary history or are taking a cut in pay

from the previous job• Show unexplained gaps in employment history• Are clearly overqualified• Are unable to recall or are hazy about names of supervisors

in the recent past or who forget their address in the recent past

Backgrounding

• It may be desirable to get a more complete history of a prospective employee

• Involves a discreet investigation into the past and present activities of the applicant, can be most informative

• Backgrounding is also employed to investigate employees being considered for promotion to positions of considerable sensitivity and responsibility

Websites

• www.instantpeoplecheck.com• www.yourownprivateeye.com• www.uscriminalcheck.com• www.secret-subjects.com• www.accuratecredit.com

Integrity and Honesty Testing

• Integrity testing should be restricted to contracts with competent trained professions

Polygraph & Psychological Stress Evaluator (PSE)

• Works on the premises lying creates conflict, which in turn causes anxiety leading to stress reactions– increased respiration– increased pulse rate– higher blood pressure– digestive disorders– Perspiration– temperature change–muscle tension– pupil dilation

An estimated 90% of all persons known to have

stolen from their employers were NOT prosecuted.

What Is A Lie?

• Making a statement or statements that one knows to be false, especially with the intent to deceive

• A lie is really a subjective evaluation• The subject must believe that the

machine works so that enough stress is produced to record

Can Someone Beat The Machine?

• A subject can affect the tracing of the machine by saying prayers or counting holes in acoustic tiles

• The training of examiners– Training can range from as little as six

weeks to as long as six months

PSI (psychological pencil-and-paper exam)

• Designed to evaluate prospective employees for honesty and integrity, drug or alcohol abuse, and violence or emotional instability

• The test questions are designed to make consistency (veracity) checks by comparing responses and to provide clues for the psychologist evaluating the personality

Table 13-3

• Scrutinizing Vendor Pencil-and-Paper Tests: Twelve Pointers in Evaluating a Test’s Relevance for Meeting Your Hiring

Goals

Employees cannot be disciplined or discharged solely on the basis on the results from a polygraph

examination.

1988 Polygraph Act

• 1. In connection with an ongoing investigation involving economic loss or injury to the employer’s business (that is, theft, embezzlement, or misappropriation)

• 2. If the employee has access to the property that is the subject of an investigation

• 3. If the employer has reasonable suspicion that the employee was involved in the accident or activity under investigation

• 4. If the employer provides to the employee before the test the specifics of the inquiry, that is, what incident is being investigated and the reason the employee is being tested

Americans With Disabilities Act

• Society tended to isolate and segregate individuals with disabilities

• Disabled individuals continually encounter various forms of discrimination– outright intentional exclusion– discriminatory effects of architectural– transportation– communication barriers

Americans With Disabilities Act (cont.)

• On July 26, 1990 Congress passed the Americans with Disabilities Act• Specifically directed at employment, public accommodations, public

services, transportation, and telecommunications• Title I

– Employment • Title II

– public services• Title III

– public accommodations• Title IV

– Telecommunications• Title V

– miscellaneous provisions of the act

Definitions for ADA

• Qualified employee or applicant – a person who, with or without reasonable accommodations, can

perform the essential functions of the job in question• Essential job functions – the basic work duties that an employee must be able to perform,

with or without reasonable accommodation• A reasonable accommodation– any modification of or adjustment to a job, an employment

practice, or the work environment that permits a qualified applicant or employee with a disability to participate in the job application process, to perform the essential functions of a job, or to enjoy benefits and privileges of employment equal to those enjoyed by employees without disabilities

• Undue hardship – defined as an action requiring significant difficulty or expense

when considered in light of a number of factors

Drug Screening

• Two major issues usually raised about this type of testing concern – invasion-of-privacy arguments

– the problem of the risk of false positives

Other Screening Options• Credit reports

– reflect an applicant’s financial situation and stability – provide other useful information such as past addresses and previous

employers• Motor vehicle records

– aid in identifying high-risk employees by noting the number of driving violations and types.

• Civil litigation records – provide detailed, documented records of an applicant’s personal

history, background, and financial relationships. – may also provide clues to other employment problems not filed as

criminal charges, such as theft, fraud, or serious misconduct

Hiring Ex-Convicts and Parolees

• Rigid exclusionary standards should never be applied to ex-convicts or parolees who openly acknowledge their past records

• A rigid policy refusing all such people employment would be denying companies many potentially good employees deserving a chance to show that they have rehabilitated

themselves

Morale

• It is essential that each member feel like an important part of the operation as both a contributor and an individual

• Recognize that each employee is in fact an important member of the organization

• Every supervisor must be indoctrinated in the importance of good morale in every business

A Program Aimed At Improving Employee Morale

• Clear statements of company policy that are consistently and fairly administered

• Regular review of wages and wage policy—updated to assure equitable wage levels

• House organ or newsletter and bulletin boards kept current• Open, two-way avenues of communication between

management and all employees• Clear procedures, formal and informal, for airing grievances

and personal problems with supervisors• Vigorous training programs to improve job skills and pave

the way for advancement• Physical surroundings—decor, cleanliness, sound and

temperature control, and general housekeeping—at a high level

Employee Assistance Programs

• Today over 90 percent of the Fortune 500 companies had introduced EAPs

• Programs vary with the type and size of company

Continuity of the Screening Program

• It is important that the program continues on a permanent basis

• Care must be taken to avoid relaxing standards or becoming less diligent in checking the backgrounds and employment histories of applicants

Auditing Assets

• Periodic personal audits by outside auditors are essential to any well-run security program

• Even the most reckless criminal would hesitate to try to set up even a short-term scheme of theft

• Audits will normally cover an examination of inventory schedules, prices, footings, and extensions

Separation of Responsibility

• The security specialist must be knowledgeable about its existence and suggest an immediate change or correction in such operational procedures whenever they appear

• Cash handling be separated from the record-keeping function

• A system of countersignatures, approvals, and

management audits should be set up

Promotion and Rotation• Many embezzlers prefer to divert small sums on a

systematic basis, feeling that the individual thefts will not be noticed

• Embezzlers dislike vacations– they are aware of the danger if someone else should

handle their accounts• The thief is in a position to alter or manipulate records in

such a way that the theft escapes attention• Promotion from within is always good business practice

Computer Records/Electronic Mail and

Funds Transfer/Fax• It is essential that the computer and its support equipment

and records be adequately protected from the internal thief

• Besides the computer, the transfer of information via fax

has become an everyday occurrence

The Mailroom

• Can be a rich field for a company thief• Some firms have taken the view that the mailroom

represents such a small exposure that close supervision is unnecessary

Trash Removal

• Employees have hidden office equipment or merchandise in trashcans and have then picked up the loot far from the premises in cooperation with the driver of the trash-collecting vehicle

• On-premises trash compaction is one way to end the use of trash containers as a safe

When Controls Fail

• It is often difficult to localize the problem sufficiently to set up specific countermeasures in those areas affected

Undercover Investigation

• Agents may be asked to get into the organization on their own initiative

• Fewer people who know of the agents’ presence, the greater the protection

• One or more top executives could be involved in serious operations of this kind

Prosecution

• They are faced with three alternatives– to prosecute– to discharge– to retain the thief as an employee

• An enlightened management would also consider the position of the as-yet-to-be-discovered thief in establishing

such policy

Discharging the Thief• Defended on many grounds

– Discharge is a severe punishment, and the offender will learn from the punishment.

– Prosecution is expensive.– Prosecution would create an unfavorable public

relations atmosphere for the company.– Reinstating the offender in the company—no matter

what conditions are placed on the reinstatement—will appear to be condoning theft.

– If the offender is prosecuted and found not guilty, the company will be open to civil action for false arrest, slander, libel, defamation of character, and other damages

Borderline Cases

• Most of these involve the pilferer, the long-time employee, or the obviously upright employee in financial difficulty who steals out of desperation

Summary

• More companies fail as a result of employee theft than from another security/loss prevention vulnerability

• Understanding the nature of theft provides a basis for its control

• Employee screening and background checks can reduce later problems with employee performance and dishonesty

• Employees who have options and feel treated like a part of a team are usually not going to become security problems

• Polygraph and paper and pencils test that are used in place of personal checks of records are not universally accepted The issue of internal theft is probably the single most important issue for a loss prevention manager

Summary